Crude slide: TCS, Infosys hit as energy firms cut costs

Slumping oil prices and increased regulatory scrutiny have compelled energy companies to tighten their belts — a move that is pinching Indian software giants Tata Consultancy Services and Infosys.

As on December 31, TCS and Infosys reported a fall of 9 per cent and 5.6 per cent, respectively, in revenue from the energy and utilities sector from the earlier (sequential) quarter.

“There is a lot of pressure on clients due to falling oil prices and hence fresh IT projects are not happening. Energy along with insurance will continue to be headwinds for TCS (going forward),” N Chandrasekaran, Chief Executive Officer and Managing Director of TCS, had said in a recent interaction.

TCS, the country’s largest software exporter, has deployed over 4,000 energy consultants with more than 40 customers globally, according to its website.

Crude oil, which was trading at $44.90 for a barrel on Wednesday, has slumped nearly 60 per cent since peaking in June because of ample supplies from the US shale oil boom and the OPEC’s decision to not cut output. Depressed oil prices are causing many producers to refrain from drawing oil from new wells and the drop in activity is telling on oilfield service companies.

Though Indian technology companies have IT and engineering service capabilities in oilfield efficiency, technical data management, production optimisation, the majority of their revenue comes from IT infrastructure support rendered to oil extractors, refiners, energy distributors and others.

“Because of the drop in oil prices, we are seeing massive pricing pressure (for IT engagements). We are seeing postponements and so on,” Vishal Sikka, Chief Executive Officer and Managing Director of Infosys, told analysts in a recent interaction. He expects Infosys’ energy vertical to be ‘troubled’ for the next two quarters. Moreover, ever-increasing legal compliance costs are pushing energy firms to reduce operational costs.

Alok Shende, Founder & Principal Analyst of Ascentius Consulting, believes that utility companies that are not dependent on oil could still increase IT spends. “While new projects may be put on hold, my sense is that the overall slowdown in IT revenue depends on how IT companies have structured deals with their clients and how many of these relationships are close to renewals,” he added.

Bengaluru-based Wipro, which has a strong presence in the energy segment, seems to have outperformed its larger rivals. Wipro has reported a 4.85 per cent sequential growth in revenue from energy, natural resources and utilities customers to $270.22 million ($257.71 million) for the third quarter.

“Wipro has at least two clients that are growing well and bucking the trend. It has also benefited from its recent deals with Canada’s ATCO,” said Sudin Apte, Research Director and Chief Executive Officer of advisory firm Offshore Insights.

Last July, Wipro bagged a $1.2-billion outsourcing deal from ATCO as part of which it took over the utility firm’s IT subsidiary for $195 million.

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